MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question:  A not-for-profit organization wants to establish two ministries with similar but independent operations, for example, a men’s ministry and a women’s ministry. It wishes to prepare and implement a budget for each ministry and wants the ability to create reports for each ministry. Ultimately, it wants any excess or deficiency of receipts compared to disbursements for a given year to be “remembered” as the ministry continues year upon year. Additionally, donors are occasionally solicited to contribute to short-term special projects with the promise that their donations will be spent only for that temporary project. For example, perhaps the women's ministry wishes to received designated contributions toward a one-time equipment purchase. How might an organization accomplish these multiple objectives: 1) tracking men's and women's ministry general fund balances year-on-year, and 2) tracking special projects' receipts and disbursements?  Answer: Before addressing ...

Question: The following question rolls out of content provided in a previous post: " Debits and Credits for Designated Gifts ." How do I generate a report in QuickBooks that shows the monthly starting balance, change for the month, and the ending balance for each Equity account relating to Designated Gifts? Answer: Our answer here will be consistent with the above cited blog post. In it we discussed simplest approach to handling Designated Funds that we can suggest.  We will illustrate assuming the use of QuickBooks Desktop. Some of these instructions may be slightly modified for users of QuickBooks Online. The following are the necessary steps: 1. Select the "Reports" pull-down menu 2. Under "Accountant & Taxes" choose "Trial Balance" 3. Modify the date range to reflect the desired period 4. Double-click on the amount for the Equity account of interest This will generate a "Transactions by Account" report.

Question: What bookkeeping system should our treasurer use to keep the church books? Answer: The bookkeeping system used by a church must be compatible with current and future treasurers’ training and experience. To adopt a system that is overly complex or suitable for only a highly qualified bookkeeper may create grave difficulty when there is turnover in the treasurer’s position. The following are several solutions that small local churches have found useful: 1. Accounting software . Intuit QuickBooks Desktop or Online and Sage (formerly Peachtree) are two general purpose accounting software packages. There are some church/ministry specific systems, such as Shelby Systems . These more specific software options tend to be more costly but also tend to have the features that the others do not.  All these software options offer government reporting, payroll processing, donor management, bank reconciliation tools, use of bank feeds (downloading transactions), budg...

Question:   Do churches use the same form of accounting as ministry organizations? Answer: Yes. Both a church and a ministry that follow Generally Accepted Accounting Principles use the same form of accounting – full accrual. But smaller churches tend to use a form of accounting such as the modified cash basis of accounting. Full accrual is governed by the rules set in place by the FASB (Financial Accounting Standards Board). FASB  116 and 117 are specific statements that discuss the application of full accrual accounting to a not for profit organization. Resources regarding this topic: We have a brief PPT linked on our website with a short comparison among the general three types of accounting. Presentation: Church and Christian Ministry Church Financial Management -  http://www.ministrycpa.com/?q=alldownloads Other possible resources may be explored on the website sponsored by Church Law & Tax Report   htt...

Question: A church is in the process of purchasing property and wants to use the modified cash basis. The church plans to pay for part of the property with cash while financing the remainder of the payments through a long-term note. What are the debit and credit effects of the following hypothetical scenario? Hypothetical Scenario: The property that the church desires to purchase costs $100,000. The church is able to pay $50,000 with cash, meaning that the remaining $50,000 will be financed through a long-term note. The church expects to pay monthly payments of $500 on the long-term note.  Answer: The modified cash basis, as we recommend its application, includes no long-term assets or liabilities on the balance sheet. Therefore, the journal entries for the above scenario are as follows: * Capital Expenditures (debit)                        ...

Question: Is a non-profit organization (NPO) allowed to make a profit during the year? If yes, is there a limit on the amount of income that can be carried over from year to year? Answer: A NPO is allowed to have an excess of revenues over expenditures in a given year or accounting period, and there is no specific cap set by the Internal Revenue Code. Generally, NPOs refer to this condition as a net increase , because it is simply an increase in funds available for use in furthering the organization's exempt purpose. However, NPOs should be aware of the following IRS guidelines regarding sources and uses of funds. Unrelated Business Income Tax :  Revenues derived from sources unrelated to the organization's exempt purpose may be subject to unrelated business income tax (UBIT). IRS Publication 598 covers the basics of unrelated business income tax. Also,   our January 10, 2011 blog post lays out some specific IRS standards regarding UBIT considerations. Pr...

Question: A tax-exempt organization would like to begin accepting donations through PayPal. How should the organization treat the service fee that is charged for each transaction? Can the donor claim a deduction for the full amount of the contribution, or for the contribution minus the service fee? Answer: With the widespread use of technology to make donations and other banking transactions easier, many organizations will soon have to face this issue. Fortunately, application of accounting principles will lead to an understanding of the correct treatment from the perspective of both the donor and the charitable organization. A charitable organization accepting donations through PayPal should use revenue recognition principles consistent with those employed in any other situation. Therefore, in order to accurately reflect the details of the situation and the intent of the donor, the full amount of the contribution should be recognized as income. The service fee should then ...

Question:   A church purchased land and constructed a new building on it. How should the church record the land acquisition and subsequent construction of its facility?  Are they considered fixed assets and, in relation to the facility, depreciated? Answer: The accounting treatment of this situation depends on the church's choice of accounting method. If a church chooses to follow GAAP  (Generally Accepted Accounting Principles) , it is required to capitalize all material fixed asset acquisitions, ranging from land and facilities to other long-lived assets exceeding some designated minimum threshold.  For example, a church may choose to capitalize and depreciate all assets with a cost greater than $2,500. If, however, the church uses the cash or modified cash basis of accounting, as most small- to medium-sized churches do, it will not record fixed assets on its books. Therefore, the cost of the land and building will simply be expensed at the time of purchas...

Question:   A church uses the modified cash basis for its accounting. Under this method, when it purchases fixed assets, the purchase amount is recorded as an expense (or "disbursement"). However, because the church does not then have a record of fixed assets, it has trouble keeping track of them. What solution would you recommend for this problem? Answer: Because most small to medium-sized churches opt for the modified cash basis of accounting, this can be a common problem. Inaccurate records of fixed assets can lead to unrealized theft, loss due to damage, or absence of a valuation of church assets. For example, the loss of church electronic equipment in a fire may not be covered by insurance if the church cannot provide an accurate record of the value of the assets.  However, this problem is easily remedied. The church treasurer or another independent individual should simply prepare a spreadsheet or other document with details of fixed asset purchases, including o...

Quickbooks Pro and QuickBooks Premier are great tools in helping churches stay on top of their finances. However, one setback with this software is that it does not come with a pre-installed year-end donor contribution report feature. A church which uses QuickBooks has two options, then, to prepare these statements: Install an add-on to QuickBooks which will accomplish this task. Use a separate, outside program to track donor giving. MinistryCPA is currently aware of two add-on programs for donor reports: Donor Statements from Big Red Consulting: http://bigredconsulting.com/products/donor-statements-for-quickbooks/ Donor Letters and Sales Receipts from Beyond the Ledger: http://www.beyondtheledgers.com/index.htm We tested both of these add-on features (they each have a free trial version). Microsoft Excel is needed to run both of them. From our tests, the Donor Statements from Big Red had better usability, seemed to provide better support, and allowed for better custo...

Question: Can you recommend an online payroll processing service for churches? Answer: We are not aware of any services that specifically target churches at this time. Existing services such as Paychecks, ADP, and Intuit's Paycycle are not always familiar with the unique characteristics of ministerial vs. non-ministerial compensation. MinistryCPA does not offer an online payroll processing service. However, we have been able to assist multiple churches to process their own payrolls. This last year, MinistryCPA aided 26 churches in preparing quarterly and annual payroll reports in cooperation with the work of their own personnel. Ministries interested in a personal consultation should post a blog inquiry with suggested time(s) that will be best to call at a phone number they should provide. Also, they typically provide a website address for the organization, if available. The ministry's website may help us to understand the nature of the organi...

Question 1: A church recently purchased a church building. Is the church required to begin depreciating the building? Answer 1: If a church uses full Generally Accepted Accounting Principles (GAAP) for its books, then fixed assets must be capitalized and depreciated. However, in many situations, it is our belief that many churches (especially small churches without accounting personnel) are best served by using the modified cash basis. This means that capital asset purchases are recorded as expenses, and not as depreciable assets. Expensing asset purchases allows the church’s congregation to more easily understand the financial situation of the church. This concept of expensing assets is discussed at greater length in the following blog posts: Church Accounting for Fixed Assets Churches Recording Depreciation For a MS-PowerPoint presentation on financial management for a church, follow the link provided below to MinistryCPA.org and click on Presentation: Church and Christian...

Question: What documents must a church file at the end of the year? Answer: Typically, churches are not required to   file the Form 990 and schedules that most non-profit organizations must prepare. Year-end payroll reports most commonly encompass the following list: Form W-2, Wage and Tax Statement Form W-3, Transmittal of Wage and Tax Statements Form 941 (or annual Form 944, if consent is gained from the IRS), Employer's Quarterly Federal Tax Return Many states require reports for income tax withholding from employees and annual wage and tax statements Form 1099-MISC, Miscellaneous Income (for payment of services to non-employee individuals in excess of $600 per year) Form 1096, Annual Summary and Transmittal of U.S. Information Returns

Question:   When is it necessary for churches to have their accounts externally audited by CPAs? Is that up to the church or is there some regulation that requires one? Answer : Generally, churches are not required by law to secure a periodic or annual audit opinion by an independent CPA firm. However, it may be within the church’s best interests to do so. Typically, larger churches are more able to incur the cost of an audit. Further, many churches that are members of the Evangelical Council for Financial Accountability ( www.ECFA.org ) are required to secure annual independent audits. Keep in mind that a church’s governing documents, or a bank from which a church has acquired a loan may require a church to secure an audit opinion.

Question: A church recently received notification of its new federal Employer's Identification Number (EIN) which stated that it must file Form 940, Form 941, and Form 1120. Why does the church have to file these and can it avoid doing so? Answer: Churches as tax exempt organizations are not subject to filing corporate income tax returns (Form 1120). Further, as tax exempt organizations, churches are not subject to federal unemployment tax (Form 940).  Most churches are however responsible to file Form 941 on a quarterly basis. On this form, churches report employee earnings and withholdings, and employer taxes due. Form 944 may be requested instead of Form 941. But a new employer must request the opt out by calling or writing the IRS. For the opt-out deadline, see Rev. Proc. 2009-51: Rev. Proc. 2009-51 . Smaller churches will find it advantageous to file the Form 944 as it is filed only once a year.  However, some small churches with only a solo-pastor who has no ...

Question: Can a church that received funds designated for one ministry/purpose use those funds for another ministry/purpose, or must it use all designated funds for their designated purpose even if the funds would be useful elsewhere? Answer: It is our belief that this is not a matter of IRS regulatory concern. It is more a matter of legal and ethical concern. Obviously, donors who give, for example, to a fund to acquire musical instruments will be greatly discouraged to see those funds spent for something other than their intentions. When a church receives funds from its congregation, those funds are no longer under the individual's control, but under the church's control, meaning that the church has the authority to use these funds as it sees fit. It is our understanding and experience that it is the Secretary of State’s offices in most states that address donor complaints. Donors have sought resolution of their complaints by going to outside agencies such as t...

Question: A church recently built a new church building. How should a church account for its fixed assets?  How should it account for the church building on its balance sheet?  How does it recognize depreciation? Answer: If a church uses full Generally Accepted Accounting Principles (GAAP) for its books, then fixed assets must be capitalized and depreciated. However, in many situations, it is our belief that many churches should use the modified cash basis. This means that capital asset purchases are recorded as expenses, and not as depreciable assets. Expensing asset purchases allows the church’s congregation to more easily understand the financial situation of the church. This concept of expensing assets is discussed at greater length in the following blog posts: Church Accounting for Fixed Assets Churches Recording Depreciation For a MS-PowerPoint presentation on financial management for a church, follow the link provided below to MinistryCPA.org and clic...

There are a lot of church planting websites with ideas and services offered to church planters. But what list might an accountant provide for a new church to consider? Initial Budget Prepare a budget forecasting both outside support and initial giving by the families expected to charter the new church. Determine the pastoral compensation level that the new congregation can realistically provide. Project costs for meeting facilities (secure a lease). Use church planting resources to develop proper strategies for initial communication and outreach; project the costs to implement the strategies and adjust based on the realities of financial resources. Organization Establish a constitution and by-laws. Incorporate with counsel of an attorney familiar with laws for tax-exempt organizations in the state. Pastor Compensation Work with the pastor to establish a wise compensation and benefits package. Consider establishing a professional expense reimbursement plan, either using an “...

Question: Help! My bookkeeping knowledge is limited to a semester of accounting at a local community college in the mid 1970's. We contracted with a local roofer to make repairs to the church's roof. We have his estimate of how much it will cost and he's started working on it. My question is how do I enter the estimate into our financial software, Church Windows. I imagine I need to create some sort of liability to show that we're involved in the work. But how do I enter the expense - do I create an expense acct labeled 'roof repairs in progress'? And then when we get the final bill, do I move the liability to an actual accounts payable acct with 'roof repairs' expense? Answer: No entry is required at the time of receiving the estimate or prior to receiving the roofer's invoice. Once the invoice is received you may enter it as an Account Payable. Your accounting program, Church Windows Software ( http://churchwindows.com/ ), will record it ...

Question: Our church is a non-profit incorporation and we have founded an affiliated church. What is the status for donations made to the affiliation church? Answer: I'm guessing that the question relates to a church planting activity by one local church that has identified a geographic area needing a local church. The established congregation (the "mother" church) aids a group of people wishing to start a new church (the "daughter" church) similar to it. Typically, the mother church provides financial oversight including paying initial ministerial salaries or renting facilities. Donations are collected by the daughter church, but managed by the mother church. Offerings are deposited into a mother church bank account, but accounted for as gifts designated to the new ministry. Contribution records and reports are managed by the mother church. Donors to the daughter church receive year-end giving statements from the mother church. Accordingly, the tax-dedu...